6: MUNICIPAL BONDS (345) Flashcards
T/F: someone who buys a muni bond at a premium must amortize the premium on a straight line basis over the remaining life of the bond
True
Formula to find yearly amortization on a bond sold at a premium
Premium amount / # of years until maturity
Example: If buy bond at 104, matures in 10 years
$400 / 10 years = $40/year
Settlement for gov securities
T+1
Define: Accrued Interest
Interest that has accrued but has not yet been paid since the last interest payment made on the bond
T/F: Municipal bonds that are backed by the income from specific projects are known as income bonds
False, known as revenue bonds
Income bonds are when you only get interest if issuer has enough earnings
What are COPs
Muni certificate of participation
form of lease revenue bond (not voter approval) allow holder to participate in land equiptment, etc. from the muni. Holders can forclose on asset
Original name for Coverdell ESA
“Education IRA”
What is an amortized bond
Each payment goes towards both interest and principal
More $ goes toward interest at beginning
Example: 30 yr mortgae is an amortized loan
If you bought a bond at 105 and it matures in 10 years, what is the yearly amortization?
$0.50
$5 / 10 years = $0.50 / year
The term “municipal fund security” refers to _____
A section 529 savings plan
Savings for college
Do revenue bonds have trust indentures? (legally binding contracts between issuer and trustees that represent bond holders interests)
Yes
revenue bond have trust indentures but GO bonds do not
Do GO bonds have trust indentures?
Legally binding contract between issuer and the trustees representing bond holders interests
No
But revenue bonds do
Settlement for muni bonds
T+2
Ppl subject to the alternative minimum tax will lose tax benefits normally associated with _____
Tax preference items
Such as tax exempt interest on muni bonds
Bond resolution (aka bond ordinances)
Details/authorizes issuance of bonds
States info on principal/interest
Qualified opinion
Bond counsel says the Muni issue is legal, but some contingencies exist
Might say this if authority to tax is in question or other situations
Does amortization increase/decrease cost basis?
Amortization decreases cost basis
Doubl barreled bond
Backed by a source of revenue and taxing ability of the issuer
When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a _____
double barreled bond
Why are GO bonds rederred to as “full faith and credit” bonds
Because they’re backed by the taxing ability of the issuer
5 kinds of revenue bonds
1) Industrial devolment
2) Special tax
3) special assesment
4) new housing authority
5) moral obligation bonds
How often does a bond trade flat
Twice a year
when the bond settles on an interest payment date
T/F: Although issued by a municiapl gov, Build America Bonds (BAB) are a taxable bond
True
BABs are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing the cost of issuing municipalities and to stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.
Does amortization increase/decrease reported interest income?
decreases reported income
coupon bond
Only get coupon payments if issuing company has enough earnings
Are public authority bonds (PHAs) backed by the full fairth and credit of US gov?
Yes
PHA bonds are backed by the full faith of the U.S. government, which guarantees rent payments on these low-income properties.
Most corporate bond issues over ____ are required to include a trust indenture and file with SEC
$5 mil
Does trust indenture say what happens if issuer defaults on the bonds?
Yes
This is included
Trust indentures are present with revenue bonds but not _____ bonds
GO bonds
They have no trust indenture
(Legally binding contract between issuer and trustees that represent bond holders interests, SEC must approve, contains things like call provisions)
Does trust indenture include terms of call ability for the bonds?
Yes
Doc has to be filed with SEC
In general, what provides the backing for GO bonds?
The taxing ability of the issuer
T/F: Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level.
True
Unqualified opinion
Bond counsel found no problems with the Muni’s issue
Straight line amortization
An equal amount of the premium is amortized each year the bond is held
T/F: a bond in default would trade flat
True
it doesn’t have any interest payments
[bonds] Dated date of a new issue
Date from which interest begins to accrue
Isn’t always the same as the semiannual interest payment dates
What is the prospectus/preliminary prospectus used for bonds known as?
Official statement
Preliminary official statement
If the bond counsel thinks a muni’s authority to tax is in question but that the rest of the issue is legal, it might render a ______ opinion
Qualified opinion
Someone buys muni bonds on April 22, 2020. When would the trade settle?
April 24
Moody’s MIG rating stands for ____
Municipal Investment Grade
Used for things like TANs (tax anticipation note)
Who pays accrued interest, the buyer or the seller of the bond?
The buyer pays
What is the only possible source of funds for an IRA
Earned income
Can IRAs be funded through gifts?
No
Only earned income
Bond counsel
Attorney for the issuer of munis
Gives opinion on tax status of bond
Unqualified opinion means found no issues
Qualified opinion means issue is legal but contingencies exist. (Example, if muni’s authority to tax is in question might render qualified opinion)
Are variable rate bonds subject to interest rate risk?
No
Their coupon is adjusted periodically
Settlement for options
T+1
Why are New Housing Authority (NHA) bonds considered relatively safe?
Subsidy of a US gov agency secures the bonds
Do COPs require voter approval?
No
They are revenue issues so no approval needed
What is accretion on a discount bond?
Slowly increase the value of discounted bond untill it reaches par value at maturity
Do revenue issues require voter approval?
No
Days/months for accrued interest on Muni bonds
30 day months
360 day years
What does it mean for a bond to be trading flat?
The bond is trading w/o accrued interest
happens when the bond settles on an interest payment date
T/F: When a bond trades flat, the buyer does not owe accrued interest to the seller
True
Dollar bonds
Actively traded bonds
Quoted as a percentage of par
Term comes from bond being quoted in dollars. Remember percentage of par equals a dollar price
Does the Trust indenture delineate how much additional debt an issuer can assume?
Ya
Can the beneficiary of a 529 plan also be the beneficiary of a Coverdell ESA?
Yes
T/F: a general obligation bond (GO) isconsidered a revenue bond
False
A general obligation bond (GO) is not a revenue bond because it is backed by something other than a revenue-producing project.
T/F: Coverdell ESA (education savings) can only accept $2,000 per child, per year.
True
> So if wanted to contribute more than $2k/year, might want a 529 plan
According to Municipal Securities Rulemaking Board (MSRB) rules, a municipal finance professional (MFP) is
an associated person of a broker-dealer engaged in municipal securities representative activities other than retail sales.
a registered representative engaged in the retail sale of municipal securities to individual investors.
subject to the political contribution rules as outlined in MSRB Rule G-37.
not subject to the political contribution rules as outlined in MSRB Rule G-37.
A)
II and IV
B)
I and IV
C)
II and III
D)
I and III
D) 1 and 3
Explanation
As defined by the MSRB, an MFP is an associated person of a broker-dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker-dealer, or who is in the supervisory chain above MFPs as described. MFPs are subject to the political contribution reporting rules as outlined in MSRB Rule G-37. Though there are exceptions for de minimis contributions, exceeding the allowable contribution limits may trigger restrictions on engaging in municipal securities business by the broker-dealer for two years.
LO 6.h
Which of the following statements regarding the flow of funds found within a municipal trust indenture are true?
It describes the disbursement of funds for revenue bond issues. It describes the disbursement of funds for general obligation issues. It is found within the official statement. It is found within the bond contract. A) I and IV B) I and III C) II and III D) II and IV
A) 1 and 4
> info found in trust indenture
(trust indenture is part of bond contract)
Explanation
The term flow of funds relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract.
LO 6.c
A bank doing which of the following would not be required to register as a municipal broker-dealer with FINRA?
A)
Holding municipal securities as custodian for public customers
B)
Providing investment research regarding municipal securities to public investors
C)
Underwriting municipal securities for municipal issuers
D)
Engaging in transactions to purchase or sell municipal securities for public customers
A) holding muni securities as custodian for public customers
Explanation
A bank simply holding municipal securities as custodian for public customers need not register as a municipal securities broker-dealer with FINRA.
T/F: Premiums are amortized; discounts are accreted
True
“Premiums are amortized; discounts are accreted”
T/F: For municipal bonds bought at a premium, the bondholder must adjust cost basis annually in such an amount that, if held to maturity, there is no reported capital gain or loss.
True
> The amortization is straight line, or the same amount must be amortized each year.
T/F: Bonds trading without accrued interest are trading flat.
True
Every bond trades flat twice a year
T/F: Every bond trades flat twice a year
True
Bonds trading without accrued interest are trading flat
